Investment Managers, Private Equity and Venture Capital Industry Terminology

Accredited Investor

A person or entity eligible to invest in private offerings under securities laws (e.g., U.S. Reg D) based on income, net worth, or professional criteria. Typically individuals with $200k+ annual income ($300k with spouse) or $1M+ net worth excluding primary residence, or holders of certain FINRA licenses.

- We can only accept accredited investors in this SPV under Rule 506(b). - Counsel is verifying accredited status via a third-party letter before the close.

Altman Z-Score

A formula that estimates a company’s bankruptcy risk using profitability, leverage, liquidity, solvency, and activity ratios. Used in credit diligence and to screen targets.

- The Altman Z-Score flagged elevated distress risk, so we adjusted our downside case. - As part of the QoE, we benchmarked the portfolio’s Z-Scores vs peers.

Assets Under Management (AUM)

The total market value of assets an investment manager oversees on behalf of clients, often used to scale management fees and benchmark firm size.

- The firm crossed $10B in AUM after closing its fifth fund. - Management fees step down after the investment period as AUM shifts from cost to NAV.

Basis Points (bps)

A unit equal to one hundredth of a percent (0.01%). Used to describe fees, yields, and spread changes precisely.

- The subscription facility priced at SOFR plus 250 bps. - We reduced management fees by 25 bps for the extension period.

Buyout

An acquisition of a controlling equity stake in a company, commonly financed with significant leverage (LBO). Focuses on operational improvements, deleveraging, and multiple expansion.

- Our core strategy is mid-market control buyouts in healthcare services. - We lost the buyout auction after a strategic bidder raised price.

Cap Table

A capitalization table summarizing ownership stakes, option pools, and securities outstanding. Critical for modeling dilution and exit allocations.

- Before the Series B, we expanded the option pool to 15% in the cap table. - The cap table showed multiple SAFEs with different valuation caps.

Capital Call

A notice to Limited Partners (LPs) to fund a portion of their committed capital for investments, fees, or expenses. Synonym: drawdown.

- We’ll issue a 10% capital call to fund the platform acquisition. - The lender allows netting capital calls against the facility outstanding.

Carried Interest (Carry)

The performance allocation paid to the General Partner (e.g., 20% of profits) after returning contributed capital and the preferred return, often with a catch-up provision.

- Carry is 20% over an 8% hurdle with a full GP catch-up. - European waterfall delays carry until the fund has returned all capital and pref.

DCF (Discounted Cash Flow)

A valuation method that estimates enterprise value by discounting projected free cash flows and terminal value at a risk-adjusted rate (WACC).

- Our DCF base case supports an EV of 10x next year’s EBITDA. - Sensitivity to WACC and terminal growth drove most of the DCF range.

DPI (Distributions to Paid-In)

A realized performance metric: cumulative distributions to LPs divided by contributed capital. Measures cash returned relative to cash invested.

- The fund’s DPI reached 0.9x after the second exit. - We target 2.0x DPI net over the fund life.

Due Diligence

The investigative process to assess a target, manager, or fund, covering financial, commercial, legal, tax, operational, technology, ESG, and regulatory risks.

- Legal diligence uncovered change-of-control clauses in key customer contracts. - Our LPs completed ODD on our valuation policy and controls.

EBITDA

Earnings before interest, taxes, depreciation, and amortization. A proxy for operating cash flow used in valuation multiples and debt capacity analysis.

- We paid 11x LTM EBITDA and underwrote 15% EBITDA CAGR. - The QoE adjusted EBITDA for nonrecurring COVID subsidies.

Enterprise Value (EV)

A measure of total company value to all capital providers: equity value plus net debt (and certain adjustments like minority interests and leases).

- At a $500M EV and $100M net debt, implied equity value is $400M. - EV multiples let us compare capital structures across comps.

Exit Strategy

The planned path to realize value: sale to a strategic or sponsor, IPO, SPAC merger, recapitalization, or secondary sale.

- The investment thesis assumes a strategic exit in year five. - We executed a dividend recap as an interim exit step.

Fair Value (ASC 820)

Accounting standard for measuring fair value using market participant assumptions and a three-level hierarchy of inputs. Governs private fund valuation policies.

- The auditor reviewed our ASC 820 Level 3 valuation models. - We updated our valuation memo to reflect observable multiples at quarter-end.

Fund of Funds (FoF)

A pooled vehicle that invests primarily in other funds to achieve diversification across managers, strategies, vintages, and geographies.

- The FoF committed to ten growth equity funds this vintage. - Our FoF sleeve reduces single-manager concentration risk.

General Partner (GP)

The fund manager responsible for sourcing, executing, and managing investments, and for fiduciary oversight of the fund. Earns management fees and carry.

- The GP committed 2% to the fund to align interests. - The GP seeks LPAC consent for a cross-fund transaction.

Growth Equity

Minority investments in proven, growing companies to fund expansion with limited leverage. Blends venture-style governance with PE discipline.

- We led a $75M growth equity round to scale internationally. - Protective provisions include vetoes on M&A and budget changes.

Hurdle Rate

The preferred return that LPs must receive before the GP earns carried interest, typically expressed as an annual IRR (e.g., 8%).

- The fund’s 8% hurdle is compounded annually. - A deal-level waterfall meets the hurdle faster than a European structure.

Information Rights

Investor rights to receive periodic financials, budgets, KPIs, and audit access, often negotiated in venture term sheets and LPAs.

- The Series A term sheet grants quarterly financials and annual audits. - Our LPA specifies GAAP financials within 90 days of quarter-end.

Initial Public Offering (IPO)

The first sale of a company’s shares to the public, listing on an exchange to raise capital and provide liquidity for existing investors.

- An IPO is the base-case exit if we hit scale and profitability targets. - We transitioned the board and controls to be IPO-ready by year three.

Internal Rate of Return (IRR)

The discount rate that sets the net present value of cash flows to zero; a time-weighted return metric sensitive to the timing of inflows and outflows.

- The deal’s gross IRR is 28% with a 2.5x MOIC. - Subscription lines can inflate early-period IRR; LPs monitor net IRR.

J-Curve

The typical fund return pattern where net returns are negative early due to fees and unrealized marks, then rise as investments mature and exits occur.

- The credit facility smooths the J-curve by delaying capital calls. - LPs expect the J-curve to trough in years 2–3.

Key Person Clause

A provision in the LPA that pauses or restricts investing if named key individuals depart or reduce time commitments, unless LPAC waives.

- After a partner’s departure, the GP sought a key person waiver. - The investment period automatically suspends upon a key person event.

LBO (Leveraged Buyout)

Acquisition funded with a significant portion of debt, relying on cash flows and asset sales for debt service, with returns from deleveraging, EBITDA growth, and multiple expansion.

- We structured a 60% debt-financed LBO with TLB and mezz. - The LBO model targets 2.2x MOIC over a five-year hold.

LPAC (Limited Partner Advisory Committee)

A committee of representative LPs advising the GP on conflicts, valuations, key person waivers, and fund governance matters.

- The GP presented a cross-fund trade to the LPAC for approval. - LPAC consent is required to extend the investment period.

Limited Partner (LP)

An investor in a private fund with limited liability who commits capital, pays management fees, and receives distributions, but does not manage the fund.

- Our LPs include pensions, endowments, and family offices. - The LP base rolled 80% of commitments into Fund IV.

MOIC (Multiple on Invested Capital)

A money multiple calculated as total value (realized plus unrealized) divided by invested capital, shown gross or net of fees and carry.

- The deal delivered a 3.0x gross MOIC in four years. - Net MOIC of the fund is 1.7x as of Q2.

Mezzanine Debt

Subordinated debt that sits between senior debt and equity, often with PIK interest and warrants, used to finance buyouts and growth.

- We added a mezz tranche with 12% PIK and 10% warrant coverage. - Mezz enhances returns but tightens fixed-charge coverage.

NAV (Net Asset Value)

The fair value of a fund’s assets minus liabilities; used for reporting, management fee bases post-investment period, and secondary pricing.

- The fund marked NAV up 6% this quarter on multiple expansion. - Secondary bids came in at 90% of NAV for the tail portfolio.

No-Shop Clause

A provision preventing the seller from soliciting or negotiating alternative offers for a set period, granting exclusivity to the buyer.

- The LOI includes a 60-day no-shop with a break fee. - Counsel tightened the no-shop to cover indirect approaches.

Operating Partner

An executive engaged by a PE firm to support value creation in portfolio companies, often focusing on commercial excellence, operations, or talent.

- The operating partner led pricing initiatives that lifted margins 300 bps. - We deployed the ops team to accelerate integration synergies.

Portfolio Company

A company in which a fund holds an equity stake. The GP oversees strategy, governance, and value creation until exit.

- The portfolio company added an independent director post-close. - We track portfolio company KPIs monthly against the value-creation plan.

Post-Money Valuation

The value of a company immediately after a financing round: pre-money valuation plus new capital raised. Determines investor ownership.

- At a $40M post-money and $10M investment, we own 25%. - The SAFE converts at the post-money cap in this round.

Preferred Return

The minimum return LPs must receive before the GP participates in carry, typically 6–10% IRR, also called the hurdle.

- Distributions follow the preferred return before GP catch-up. - The GP proposed lowering the pref in exchange for lower fees.

Quality of Earnings (QoE)

An independent analysis that normalizes EBITDA, verifies revenue recognition, and assesses working capital and cash conversion.

- QoE removed one-time COVID grants from EBITDA. - We adjusted purchase price for the working capital peg based on the QoE.

Rollover Equity

Seller equity reinvested into the new capital structure, aligning incentives and reducing cash consideration at close.

- Founders rolled 30% of proceeds to signal confidence. - The rollover created tax deferral and improved leverage metrics.

Runway

The number of months a company can operate before needing new capital, given current cash and burn rate.

- After the venture debt draw, runway extended to 18 months. - We cut burn to add six months of runway ahead of the Series B.

SAFE (Simple Agreement for Future Equity)

A startup financing instrument that converts into equity at a future round, typically with a valuation cap and/or discount, no interest, and no maturity.

- We negotiated a $20M cap SAFE with MFN rights. - Multiple SAFEs stack and can dilute the next priced round.

Secondary Sale (Secondaries)

The purchase and sale of existing interests in funds (LP-led) or portfolios/companies (GP-led), providing liquidity before natural exits.

- We sold our LP interest at a 5% discount to NAV in a secondary. - The GP-led secondary moved three assets into a continuation fund.

Subscription Credit Facility (Capital Call Line)

A short-term revolving line secured by LP commitments used to bridge capital calls, manage cash, and reduce administrative calls.

- The facility’s use improved the fund’s early IRR but LPs watch netting. - We repaid the line within 90 days of the call per policy.

TVPI (Total Value to Paid-In)

A fund-level performance multiple: cumulative value (NAV plus distributions) divided by paid-in capital. Equals DPI plus RVPI.

- TVPI is 1.8x with DPI at 0.6x and RVPI at 1.2x. - LPs focus on net TVPI to assess manager alpha after fees.

Term Sheet

A largely nonbinding document outlining key economic and governance terms of a transaction before definitive agreements.

- The Series A term sheet sets a $60M pre-money and a 10% option pool. - We included drag-along and pro rata rights in the term sheet.

Unicorn

A privately held startup valued at $1 billion or more.

- The company became a unicorn after the $150M Series D. - Unicorn status helps with recruiting and partnership credibility.

Venture Debt

Debt financing for startups, often accompanied by warrant coverage, used to extend runway and fund growth with less dilution.

- We secured a $20M venture debt facility with 1% warrant coverage. - Venture debt covenants are lighter but include liquidity minimums.

Vintage Year

The year a fund begins investing or has its first close. Used to benchmark performance against comparable market cycles.

- Our 2019 vintage outperformed peers on net IRR. - LPs build programs diversified across vintage years.

Waterfall (Distribution Waterfall)

The priority and order of distributions between LPs and GP, including return of capital, preferred return, catch-up, and carry split. Can be deal-by-deal (American) or whole-fund (European).

- The European waterfall delays carry until aggregate return hurdles are met. - We modeled both waterfalls to show timing of GP carry.

Write-Down and Write-Off

A write-down reduces the carrying value of an asset; a write-off reduces it to zero when recovery is unlikely. Reflects impairment under fair value accounting.

- We wrote down the position by 30% after the lost contract. - The bankruptcy filing triggered a full write-off at quarter-end.

XIRR

Excel’s function that calculates the IRR for irregular cash flow timing using actual dates. Standard tool for fund performance and deal analysis.

- We used XIRR to compute the net IRR of quarterly cash flows. - The auditor reconciled GP-reported IRR to an independent XIRR.

Year-over-Year (YoY)

A measurement that compares performance to the same period in the prior year, smoothing seasonality effects.

- YoY revenue growth accelerated to 25% in Q2. - We track YoY churn improvement as a key KPI.